U.S. GDP Grew 4.1% In Third Quarter, More Than Previously Estimated

New data shows the economy is growing, giving support to the Federal Reserve’s decision to begin cutting back on asset purchases earlier this week and leading the stock market to a strong Friday open.

According to the Bureau of Economic Analysis, real gross domestic product — output produced in the United States — actually grew at a rate of 4.1% in the third quarter, up from BEA’s previous estimate of a 3.6% growth rate. The final results are also a gain over the second quarter’s 2.5% GDP growth.

The Dow Jone Industrial Average added more than 65 points in early morning trading following the news and the S&P gained about .4%. On the bond side, the 10-year treasury note yield inched up to 2.91.

“As the picture for the third quarter becomes increasingly clear, the story is improving as well,” wrote Jim Baird, chief investment officer for Plante Moran Financial Advisors, in a note following the results. While Baird is optimistic about the long term momentum, he notes that the details were not quite as positive as the headline number.

The BEA said the increase reflect investments in inventory by the private sector, as well as gains in fixed investments, exports and non-federal government spending. The rate was negatively impacted by lower federal government spending and an increase in imports.

Private business added $115.7 billion in inventory in the third quarter, this comes after additions of $56.6 billion in the second and $42.2 billion in the first. The additions added 1.67 percentage points to the change in real GDP, after adding .41 percentage points in the second quarter. Baird points out, “If there’s anything that takes some luster off the result, it would be that expanding inventories accounted for about one-third of the growth in the third quarter.” But even without the inventory buildup, he notes, the growth would have been solid.

As previously estimated, the price index for gross domestic purchases — a measure of prices paid by U.S. residents — increased by 1.8%. The index was up .2% in the second quarter. Real personal consumption expenditures increased by 2%, compared to 1.8%, suggesting Americans are spending more heading into the New Year.

One area where results did not improve from the second quarter, however, is gross domestic income. This measure of economic output as costs acquired and incomes earned in GDP production was up 1.8% in third quarter versus 3.2% in the second.

Looking ahead, economists don’t expect fourth quarter results to be as strong thanks to the federal government shutdown and contracted inventory additions.

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